<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-26034
ORAVAX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction
of incorporation of organization)
38 SIDNEY STREET, CAMBRIDGE, MASSACHUSETTS
(Address of principal executive offices)
04-3085209
(I.R.S. Employer
Identification Number)
02139
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 494-1339
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: NOT APPLICABLE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASS OF COMMON STOCK, AS OF
LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF NOVEMBER 5, 1998
----- ----------------------------------
<S> <C>
Common Stock, $.001 par value 17,762,712
</TABLE>
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<PAGE> 2
ORAVAX, INC
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997................................ 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1997... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997.................. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
PART II. OTHER INFORMATION.................................. 18
SIGNATURES.................................................. 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORAVAX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS EXCEPT SHARE DATA
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 974 $10,274
Short-term investments...................................... -- 1,054
Deferred financing costs.................................... 212 847
Prepaid and other current assets............................ 169 1,529
-------- -------
Total current assets................................... 1,355 13,704
-------- -------
Property and equipment, net................................. 2,158 3,524
Investment in and advances to Joint Venture................. (246) (535)
Restricted investments...................................... 398 394
Other assets................................................ 210 257
-------- -------
Total assets........................................... $ 3,875 $17,344
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 1,024 $ 935
Accrued expenses............................................ 2,614 3,659
Deferred joint venture revenue.............................. 363 91
Obligation under capital leases............................. 465 1,316
Obligation under installment debt........................... 1,160 260
-------- -------
Total current liabilities.............................. 5,626 6,261
Obligation under capital leases, excluding current
portion................................................... 173 416
Installment debt, excluding current portion................. 0 882
-------- -------
Total liabilities...................................... 5,799 7,559
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized in 1998 and 1997; none issued or outstanding... -- --
Convertible preferred stock, $.001 par value; 9,000 shares
authorized in 1998 and 1997; 2,827 and 6,300 shares issued
and outstanding in 1998 and 1997 (liquidation preference
of $2,827)................................................ 2,326 5,601
Common stock, $.001 par value; 50,000,000 and 25,000,000
shares authorized in 1998 and 1997; 17,249,778 and
10,371,543 shares issued and outstanding in 1998 and
1997...................................................... 17 10
Additional paid-in capital.................................. 78,494 74,962
Deferred compensation....................................... (50) (94)
Accumulated deficit......................................... (82,711) (70,694)
-------- -------
Total stockholders' equity............................. (1,924) 9,785
-------- -------
Total liabilities and stockholders' equity............. $ 3,875 $17,344
======== =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4
ORAVAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Collaborative research and
development -- related party............... $ 1,699 $ 1,869 $ 5,656 $ 5,581
Government grants and other.................. 178 141 615 343
Interest..................................... 30 140 234 574
----------- ----------- ----------- -----------
1,907 2,150 6,505 6,498
----------- ----------- ----------- -----------
EXPENSES:
Research and development..................... 3,233 3,787 10,391 10,963
General and administrative................... 960 776 2,807 2,615
Interest..................................... 58 94 200 331
----------- ----------- ----------- -----------
4,251 4,657 13,398 13,909
----------- ----------- ----------- -----------
Loss from operations......................... (2,344) (2,507) (6,893) (7,411)
Equity in operations of joint venture........ (1,313) (1,437) (4,292) (4,608)
----------- ----------- ----------- -----------
Net loss from operations..................... $ (3,657) $ (3,944) $ (11,185) $ (12,019)
=========== =========== =========== ===========
Convertible Preferred Stock dividend......... 39 -- 197 --
Accretion to conversion discount of
Convertible Preferred Stock................ 212 -- 635 --
Net loss to common shareholders.............. $ (3,908) $ (3,944) $ (12,017) $ (12,019)
=========== =========== =========== ===========
Net loss per basic and diluted common
share...................................... $ (0.26) $ (0.39) $ (0.97) $ (1.20)
Weighted average number of basic and diluted
shares outstanding......................... 14,995,649 10,052,414 12,401,826 10,007,475
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
ORAVAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss from operations............................... $(11,185) $(12,019)
Adjustments to reconcile net loss from operations to
net cash used in operating activities:
Depreciation and amortization..................... 1,474 1,671
Equity in operations of joint venture............. 4,292 4,608
Amortization of debt discount..................... 108 115
Non-cash compensation............................. 44 91
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.... (40) 90
Other assets................................. 47 28
Accounts payable and accrued expenses........ (956) (766)
Deferred revenue -- related party............ 272 (473)
-------- --------
Net cash used in operating activities....................... (5,944) (6,655)
-------- --------
Cash flows from investing activities:
Sales of short-term investments........................ 1,050 4,224
Expenditures for property and equipment................ (38) (194)
Investment in joint venture............................ (4,581) (4,311)
-------- --------
Net cash used in investing activities....................... (3,569) (281)
-------- --------
Cash flows from financing activities:
Proceeds from Common Stock issuances................... 66 135
Proceeds from Preferred Stock issuances, net........... 1,400 --
Principal payments under capital lease obligations..... (1,163) (1,160)
Principal payments under installment debt
obligations........................................... (90) (330)
-------- --------
Net cash provided by (used in) financing activities......... 213 (1,355)
-------- --------
Net decrease in cash and cash equivalents................... (9,300) (8,291)
Cash and cash equivalents at beginning of period............ 10,274 14,916
-------- --------
Cash and cash equivalents at end of period.................. $ 974 $ 6,625
======== ========
</TABLE>
Non-cash disclosure of Convertible Preferred and Common Stock conversions: as of
September 30, 1998, 3,473 shares of Convertible Preferred Stock, including
applicable stock dividends, had been converted into 6,710,280 shares of Common
Stock.
Non-cash disclosure of property and equipment: as of September 30, 1998,
expenditures for property and equipment excluded $70,000 of equipment lease
renewals.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
ORAVAX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
1. NATURE OF BUSINESS
OraVax, Inc. ("OraVax" or the "Company") was incorporated in Delaware in
1990 and has its principal offices and laboratories at 38 Sidney Street,
Cambridge, Massachusetts and manufacturing facilities in Canton, Massachusetts.
OraVax's mission is the discovery, development and commercialization of
biologic products for the prevention or treatment of human infectious diseases.
The Company's products are vaccines that stimulate the body's own immunity to
provide long term protection against disease, as well as antibody products that
provide immediate passive immunity to treat existing infections or to protect
against acute disease risk. The Company employs both classical biologic product
methods and innovative technologies to produce therapeutics and preventatives
that meet the challenges of each infection and disease process.
The ultimate success of the Company is dependent upon its ability to raise
capital through equity financings, direct financings, corporate partnerships,
sale of product and interest income on invested capital. The Company's capital
requirements may change depending upon numerous factors, including progress of
the Company's research, development and clinical programs, time required to
obtain regulatory approvals, resources the Company devotes to self-funded
projects, proprietary manufacturing methods and advanced technologies and demand
for the Company's products, if and when approved.
Additional capital will be required to ensure the on-going viability of the
Company. The Company has secured interim sources of financing to support
operations into the first quarter of 1999. This funding is secured with the
tangible and intangible assets of the Company, in addition to some of its rights
in the Joint Venture Partnership in H. pylori. While management believes that
additional capital may be available to fund operations, there can be no
assurance that additional funds will be available when required, on terms
acceptable to the Company.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, manufacturing limitations, third party
reimbursements, collaborative arrangements, and compliance with government
regulations.
2. MERGER WITH PEPTIDE THERAPEUTICS GROUP PLC AND RETIREMENT OF 6% CONVERTIBLE
PREFERRED STOCK
On November 10, 1998, the Company entered into an agreement to be merged
with Cambridge, England based Peptide Therapeutics Group PLC ("Peptide") for
stock of Peptide and cash totaling approximately $15 million. Peptide is a
biopharmaceutical company engaged in the research and development of novel drugs
and vaccines, and is listed on the London Stock Exchange, under the symbol PTE.
Peptide currently has four products in clinical development with several
pre-clinical and research programs. The Company and its Joint Venture partner
Pasteur Merieux Connaught ("PMC") are already collaborating with Peptide in
using Peptide's proprietary platform technology to create oral vaccines for the
treatment of H. pylori. The merger will create a larger biopharmaceutical
company involved in the development of novel drugs, vaccines and antibody
products that control significant human diseases. The merged company will have a
total of ten products in development, six of which are currently in clinical
trials, with a further four scheduled to go into clinical trials in the next
twelve months, and multiple corporate partnerships including those with PMC and
SmithKline Beecham. This new business combination will result in a broader
portfolio of product programs, and greater market presence and potential for
expanded corporate partnerships.
The transaction will take the form of a merger of the Company with a
subsidiary of Peptide, formed for the transaction, and the Company will become a
wholly owned subsidiary of Peptide following the merger. Completion of the
merger is subject to certain conditions, including approval by the shareholders
of each
6
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company and Peptide raising additional capital to provide sufficient working
capital for the combined company following the merger, as required by the rules
of the London Stock Exchange. The merger is anticipated to be completed during
the first quarter of 1999.
Simultaneous with the execution of the Merger Agreement, Peptide purchased
approximately 95% of the Company's outstanding 6% Convertible Preferred Stock
("Convertible Preferred Stock") for an aggregate price of approximately $3
million. Upon completion of the merger, the Convertible Preferred Stock, held by
Peptide, will be retired.
Refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations: Subsequent Event: Peptide Therapeutics Group PLC for
additional details.
3. SHORT-TERM BRIDGE LOAN
On November 2, 1998, the Company obtained a short-term bridge loan, in the
amount of $3 million, from Pasteur Merieux Connaught ("PMC") to support
operations. The Company pledged 12% ownership in the Joint Venture Partnership
as collateral. The Company granted PMC a controlling vote regarding all
marketing-related decisions, thereby granting PMC overall direction of
marketing-related matters. The Company will retain equal voting authority in all
non-marketing-related decisions. The loan is to be repaid in two installments:
$2 million on January 31, 1999 and $1 million on June 30, 1999. The loan bears
interest at an annual rate of 5.42% which is payable when each installment of
principal is due.
In the event that the Company defaults on the loan, PMC would, by virtue of
the Company's pledge of 12% ownership in the Joint Venture Partnership to secure
the loan, increase its ownership interest in the Joint Venture Partnership to
62%, thereby obtaining overall direction of all Joint Venture Partnership
matters. The Company's share of future research, development, clinical and
commercialization costs, and of profits from Target Product sales would then
decrease from the present 50% to 38%.
4. BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 1998, and the
consolidated statements of operations and cash flows for the three and nine
months ended September 30, 1998 and 1997 are unaudited, have been prepared on a
basis substantially consistent with the audited financial statements, and, in
the opinion of management, include all adjustments (consisting of normal,
recurring adjustments) necessary for a fair presentation of results for these
interim periods. The preparation of interim financial statements in conformity
with generally accepted accounting principles requires the use of management's
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the interim financial statements and the reported amounts of revenues and
expenses during the reporting period. The results for the nine months ended
September 30, 1998 are not necessarily indicative of results for the entire
year, although the Company expects to incur a significant loss for the year
ending December 31, 1998. These interim financial statements should be read in
conjunction with the annual consolidated financial statements included in the
Company's annual report filed on Form 10-K for the year ended December 31, 1997.
5. CHANGES IN ACCOUNTING POLICIES
Accretion of Convertible Preferred Stock
In December 1997, in a private placement financing, the Company issued
6,300 shares of 6% Convertible Preferred Stock ("Convertible Preferred Stock"),
for $1,000 per share, providing cash proceeds of $5.6 million, net of $700,000
in deal costs. Holders of the Convertible Preferred Stock are entitled to a
conversion discount that starts at 5% in December 1997 and increases to a
maximum of 21% by June 1999. At December 31, 1997, the value of the discount is
$846,788, which has been recorded as deferred financing costs and was to be
amortized over the eighteen month discount period. In the second quarter of
1998, the amortization period was changed from eighteen months to twelve months
to reflect the volume of conversions to the Company's Common Stock and the
second quarter's accretion to the conversion discount includes a retroactive
adjustment of $141,000. In conjunction with the November 10, 1998 Convertible
Preferred Stock buyback, the remaining $212,000 in deferred financing costs will
be amortized in the fourth quarter of 1998.
7
<PAGE> 8
6. COMPUTATION OF NET LOSS PER COMMON SHARE
For the year ended December 31, 1997, the Company adopted Statement of
Accounting Standards No.128 ("SFAS 128"), which requires the presentation of
Basic and Dilutive earnings per share, which replaces primary and fully diluted
earnings per share. Earnings per share have been restated for all periods
presented to reflect the adoption of SFAS 128. Basic net loss per share is
computed using the weighted average number of common shares outstanding during
the period, plus the dilutive effect of common stock equivalents. Common stock
equivalent shares consist of Convertible Preferred Stock and stock options. The
dilutive computations do not include common stock equivalents for stock options
of 1,370,696 and 1,334,274 at September 30, 1998 and September 30, 1997,
respectively, and Convertible Preferred Stock convertible to 15,875,202 shares
of Common Stock at September 30, 1998, as there inclusion would be
anti-dilutive.
7. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No.130, "Reporting Comprehensive Income". This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. For the three and nine
months ended September 30, 1998 and 1997, comprehensive income was the same as
net income.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 by January 1,
2000. The Company does not expect SFAS 133 to have a material impact on its
financial statements.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
As described below under "Subsequent Event: Peptide Therapeutics Group
PLC", the Company on November 10, 1998 entered into an Agreement to merge with
Peptide in a transaction anticipated to close prior to the end of the first
quarter of 1999. Peptide currently has four products in clinical development
with several pre-clinical and research programs. The Company and PMC, the
Company's collaborative partner, are already collaborating with Peptide in using
Peptide's proprietary platform technology to create oral vaccines for the
treatment of H. pylori. The merger will create a larger biopharmaceutical
company involved in the development of novel drugs, vaccines and antibody
products that control significant human diseases. The merged company will have a
total of ten products in development, six of which are currently in clinical
trials, with a further four scheduled to go into clinical trials in the next
twelve months, and multiple corporate partnerships including those with PMC and
SmithKline Beecham. The new business combination will result in a broader
portfolio of product programs, and greater market presence and potential for
expanded corporate partnerships.
Since its inception in 1990, the Company has been engaged in the discovery
and development of vaccines and injected antibody products to prevent or treat
human infectious diseases.
OraVax is currently pursuing four proprietary product development programs
which target diseases that have high rates of incidence, compelling
pharmaco-economic profiles, and against which no adequate therapeutic or
preventative antibody products or vaccines are currently available. The diseases
targeted by these products include, 1) peptic ulcers, gastritis and stomach
cancer, 2) viral pneumonia in children, 3) antibiotic-associated colitis, and 4)
a group of related viral diseases including Yellow Fever, Japanese encephalitis,
dengue, tick borne encephalitis and hepatitis C. The Company's product
candidates are designed to generate either mucosal or systemic immunity, as
appropriate to each disease target. The Company has developed a portfolio of
biologic production technologies appropriate to the biology of each infectious
agent.
The Company's principal product candidates are the following:
<TABLE>
<CAPTION>
PRODUCT CANDIDATE INDICATION TECHNOLOGY STATUS
----------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Helicobacter pylori Prevention and Recombinant protein Phase II trials
(H. pylori) vaccines treatment of peptic vaccine
ulcers, gastritis and
stomach cancer
HNK20 antibody Prevention of pneumonia Monoclonal IgA nosedrop Phase III trials
caused by respiratory antibody
syncytial virus in high
risk children
CdVax vaccine and CdIG Prevention and Toxoid vaccine and Toxoid IND 1998 Phase I
immune-globulin treatment of Hyper-immune globulin trial 1999
antibiotic-associated
colitis
ChimeriVax(TM) Japanese Prevention of infection Chimeric live IND 1998
encephalitis by the Japanese attenuated viral
(follow-on products encephalitis and other vaccine
include dengue, flavi viruses
hepatitis C, TBE)
Arilvax(R) YF vaccine Prevention of infection Single-dose live OraVax to facilitate US
(a product of Evans by the Yellow Fever attenuated viral registration (already
Medical, Limited) virus vaccine marketed in the UK and
Europe) Phase III
trials
</TABLE>
To date, the Company has not received any revenues from the sale of
products and does not expect to receive any such revenues until late 2000. The
first product revenues are anticipated from sales of the Yellow Fever vaccine,
under the Company's partnership with Evans Medical Limited. The Company's losses
incurred since inception resulted principally from expenditures under its
research and development programs and the Company expects to incur significant
operating losses over the next several years due primarily to expanded research
and development efforts, preclinical testing and clinical trials of its product
candidates, the acquisition of additional technologies, the establishment of
manufacturing capability and the performance of
9
<PAGE> 10
commercialization activities. Results of operations may vary significantly from
quarter to quarter depending on, among other factors, the progress of the
Company's research and development efforts, the receipt, if any, of milestone
payments, the timing of certain expenses and the establishment of collaborative
research agreements.
RESULTS OF OPERATIONS
Three Months ended September 30, 1998 compared with Three Months ended
September 30, 1997
The Company's total revenues decreased to $1,907,000 in the three months
ended September 30, 1998 from $2,150,000 in the three months ended September 30,
1997. In the three months ended September 30, 1998, the Company's revenues
consisted of $1,699,000 of collaborative research revenues earned under the
Company's collaboration (the "Joint Venture") with Pasteur Merieux Connaught
("PMC"), $178,000 from government grants and license fees earned in connection
with sublicensing its CagA antigen to BioMerieux Vitek, Inc. and BioMerica,
Inc., and $30,000 in interest earned on invested funds. In the three months
ended September 30, 1997, the Company's revenues consisted of $1,869,000 of
collaborative research revenues earned under the Joint Venture, $141,000 from
government grants and an annual license fee earned in connection with
sublicensing its CagA antigen to BioMerieux Vitek, Inc., and $140,000 in
interest earned on invested funds. The decreased revenue was attributable to
decreases in research and development activities under the Joint Venture with
PMC and in interest income as a result of declining cash investments offset by
an increase in license revenue earned in connection with the 1998 sublicense of
the CagA antigen to BioMerica, Inc.
The Company's total costs and expenses decreased to $4,251,000 in the three
months ended September 30, 1998 from $4,657,000 in the three months ended
September 30, 1997. Research and development expenses decreased 15% to
$3,233,000 in the three months ended September 30, 1998 from $3,787,000 in the
three months ended September 30, 1997. Significant contributors to the Company's
research and development expenditures in the third quarter of 1998, versus the
third quarter of 1997, included the conduct of three small-scale Phase II
clinical studies under its H.pylori program and advanced activities under its
Japanese encephalitis program, including the investment in other aspects of the
Chimerivax family of vaccine opportunities. These expenditures were offset by a
decrease in costs resulting from expenses that were incurred in the third
quarter of 1997, under the RSV program, that were not incurred in the third
quarter of 1998. The 24% increase in general and administrative expenses to
$960,000 in the three months ended September 30, 1998 from $776,000 in the three
months ended September 30, 1997 is principally due to advanced Chimerivax patent
efforts, business development costs as the Company continues to focus its
efforts on obtaining strategic collaborations, and legal costs associated with
the Company's pursuit of potential equity financings and selling of assets to
raise capital needed to support operations. Interest expense decreased to
$58,000 in the three months ended September 30, 1998 from $94,000 in the three
months ended September 30, 1997.
The Company accounts for its investment in the Joint Venture Partnerships
under the equity method of accounting. Accordingly, the Company recorded its
$1,313,000 and $1,437,000 share of the Joint Venture Partnerships' losses in the
third quarter of 1998 and 1997, respectively. The decreased loss is principally
due to third party obligations, incurred by the Joint Venture Partnerships, in
the third quarter of 1997 compared to the same period in 1998.
The Company incurred a net loss from operations of $3,657,000 in the three
months ended September 30, 1998 compared to a net loss from operations of
$3,944,000 in the three months ended September 30, 1997.
In the first quarter of 1998, the Company began recognizing the annual
cumulative 6% dividend that accrues in stock and the amortization of the
conversion discount recorded as deferred financing costs, related to the
December 1997 Convertible Preferred Stock financing.
The Company incurred a net loss to common shareholders of $3,908,000 in the
three months ended September 30, 1998 compared to a net loss to common
shareholders of $3,944,000 in the three months ended September 30, 1997.
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<PAGE> 11
Nine Months ended September 30, 1998 compared with Nine Months ended September
30, 1997
The Company's total revenues increased to $6,505,000 in the nine months
ended September 30, 1998 from $6,498,000 in the nine months ended September 30,
1997. In the nine months ended September 30, 1998, the Company's revenues
consisted of $5,656,000 of collaborative research revenues earned under the
Company's collaboration (the "Joint Venture") with Pasteur Merieux Connaught
("PMC"), $615,000 from government grants and license fees earned in connection
with sublicensing its CagA antigen to BioMerieux Vitek, Inc. and BioMerica,
Inc., and $234,000 in interest earned on invested funds. In the nine months
ended September 30, 1997, the Company's revenues consisted of $5,581,000 of
collaborative research revenues earned under the Joint Venture, $343,000 from
government grants and an annual license fee earned in connection with
sublicensing its CagA antigen to BioMerieux Vitek, Inc., and $574,000 in
interest earned on invested funds. Principal components of revenue in 1998
versus 1997 include increases in research and development activities of the
Joint Venture with PMC, in grant revenue from the October 1997 award of a
C.difficile Phase II Small Business Innovation Research (SBIR) grant from the
National Institute of Health (NIH) and in license revenue earned in connection
with the 1998 sublicense of its CagA antigen to BioMerica, Inc. offset by a
decrease in interest income as a result of declining cash investments.
The Company's total costs and expenses decreased to $13,398,000 in the nine
months ended September 30, 1998 from $13,909,000 in the nine months ended
September 30, 1997. Research and development expenses decreased 5% to
$10,391,000 in the nine months ended September 30, 1998 from $10,963,000 in the
nine months ended September 30, 1997. Significant contributors to the Company's
research and development expenditures in the nine months ended September
30,1998, versus the nine months ended September 30, 1997, included the conduct
of four small-scale Phase II clinical studies under its H.pylori program and
advanced activities under its Japanese encephalitis program, including the
investment in other aspects of the Chimerivax family of vaccine opportunities.
These expenditures were offset by a decrease in costs resulting from expenses
that were incurred in the nine months ended September 30, 1997, under the RSV
program, that were not incurred in the nine months ended September 30, 1998, and
from aggressive cost control. The 7% increase in general and administrative
expenses to $2,807,000 in the nine months ended September 30, 1998 from
$2,615,000 in the nine months ended September 30, 1997 is principally due to
advanced H.pylori and Chimerivax patent efforts, business development costs as
the Company continues to focus its efforts on obtaining strategic
collaborations, and legal costs associated with the Company's pursuit of
potential equity financings and selling of assets to raise capital needed to
support operations offset by a decrease in expenses associated with the
Company's workforce reduction in the second quarter of 1997. Interest expense
decreased to $200,000 in the nine months ended September 30, 1998 from $331,000
in the nine months ended September 30, 1997.
The Company accounts for its investment in the Joint Venture Partnerships
under the equity method of accounting. Accordingly, the Company recorded its
$4,292,000 and $4,608,000 share of the Joint Venture Partnerships' losses in
year-to-date September 30, 1998 and 1997, respectively. The decreased loss is
principally due to third party obligations, incurred by the Joint Venture
Partnerships in the nine months ended September 30,1997 as compared to the same
period in 1998, which were offset by an increase in the 1998 budgeted research
and development activities of both OraVax and PMC.
The Company incurred a net loss from operations of $11,185,000 in the nine
months ended September 30, 1998 compared to a net loss from operations of
$12,019,000 in the nine months ended September 30, 1997.
In the first quarter of 1998, the Company began recognizing the annual
cumulative 6% dividend that accrues in stock and the amortization of the
conversion discount recorded as deferred financing costs, related to the
December 1997 Convertible Preferred Stock financing.
The Company incurred a net loss to common shareholders of $12,017,000 in
the nine months ended September 30, 1998 compared to a net loss to common
shareholders of $12,019,000 in the nine months ended September 30, 1997.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company's aggregate cash and investments were $1,372,000 at September
30, 1998, a decrease of $10,350,000 since December 31, 1997. Included in cash
and investments is $398,000 and $394,000 at September 30, 1998 and December 31,
1997, respectively, of restricted six-month treasury securities, which support
letters of credit for operating and equipment leases. Cash used by operations
during the nine months ended September 30, 1998, principally to support research
and development, was $5,944,000. The Company expended $38,000 for property and
equipment, repaid $1,163,000 of its capital lease obligations and repaid $90,000
of its installment debt, net of accrued interest, during the period. In
addition, the Company invested $4,581,000 in the Joint Venture with Pasteur
Merieux Connaught during the nine months ended September 30, 1998. In early
1998, the Company received the $1,400,000 remainder of cash proceeds from the
December 1997 Convertible Preferred Stock financing. Also, the Company received
$66,000 in proceeds from Common Stock issuances during the period.
Since inception, the Company's cash expenditures have exceeded its
revenues. Operations have been funded principally through public and private
placements of equity securities, equipment lease financing, revenues from the
Company's H. pylori Joint Venture with PMC, government grants and interest
income. The Company's future capital requirements will depend on many factors,
including, but not limited to, the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the funding of the Company's share
of the expenses of collaborative arrangements, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, competing technological and market developments, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the development of commercialization
activities and arrangements, and the acquisition of additional facilities and
capital equipment.
As described below under "Subsequent Event: Peptide Therapeutics Group
PLC", the Company on November 10, 1998 entered into an Agreement to merge with
Peptide in a transaction anticipated to close prior to the end of the first
quarter of 1999. As a condition to the merger, Peptide expects in mid-January
1999 to raise additional funds to provide working capital sufficient for the
combined needs of the merged companies, as required by the rules of the London
Stock Exchange.
Pending completion of its merger with Peptide, the Company plans to finance
its cash needs in the near term principally through its existing cash reserves,
together with interest earned thereon, revenues from the H. pylori Joint Venture
and previously awarded government grants. The Company believes, based upon its
current operating plan, that, in addition to its available cash balances and
known revenues, it will need additional financing in the first quarter of 1999
in order to fund the Company's operations. On November 2, 1998, the Company
completed a bridge loan from PMC in the amount of $3 million to provide
operating funds for the Company during the period prior to the anticipated
closing of the merger with Peptide. This loan is secured by a 12% partnership
interest of the Company in the Joint Venture and is repayable to PMC -- $2
million on January 31, 1999 and $1 million on June 30, 1999. Peptide also has
agreed to provide working capital financing on a secured basis under certain
circumstances. Changes in the Company's research and development plans or other
events affecting the Company's operations may result in accelerated or
unexpected expenditures. The Company is continuing to review its burn rate and
has implemented expenditure initiatives to conserve its cash resources,
including putting non-essential expenditures on hold. As part of the merger with
Peptide, the combined entity will be seeking financing. The Company in the
meantime continues to pursue corporate collaborations and the award of new
government grants. There can be no assurance, however, that additional financing
will be available from any of these sources, or if available, will be available
on satisfactory terms. The Company's inability to obtain needed funding on
satisfactory terms may require the Company to delay, scale back or eliminate one
or more of its planned product development programs, scale back its planned
manufacturing operations or enter into collaborative arrangements that may
require the Company to issue additional equity or relinquish rights to certain
technologies or product candidates that the Company would not otherwise issue or
relinquish. In the event Peptide is unable to complete its financing or its
merger with the Company is abandoned, the Company would be required to seek
other sources of financing.
12
<PAGE> 13
NASDAQ DELISTING
At June 30, 1998, the Company's net tangible assets (total assets minus
goodwill and liabilities) was $1.9 million. The minimum net tangible asset
requirement for continued listing by the Nasdaq National Market ("Nasdaq NM") is
$4.0 million. The Company received a notice of delisting from the Nasdaq Stock
Market, Inc. ("Nasdaq") indicating that because the Company is not in compliance
with the minimum net tangible asset requirement the Company's stock would be
delisted from trading on the Nasdaq NM. The Company was also notified by Nasdaq
of non-compliance with the minimum $1 per share bid price and minimum
requirement for the public market float of $5 million. The Company appealed the
delisting and a hearing was granted before an NASD panel concerning the
delisting issues. The Company presented its plans to the Panel and has continued
to update Nasdaq on the progress of these plans. The Company has not yet
received a resolution by the appeals panel, and its stock has continued to trade
on the Nasdaq NM. As of November 13, 1998, the Company was in compliance with
the minimum public market float requirement. The Company is still out of
compliance with the net tangible asset and minimum bid price requirements of
Nasdaq NM. Though the Company has requested a postponement of the Panel's
decision on delisting until completion of the merger, no assurance can be given
that the Company's stock will not be delisted prior to that.
If the Company's stock is delisted from the Nasdaq NM, the Company would
apply for listing on the Nasdaq SmallCap Market. However the Company might not
meet the minimum maintenance listing requirements required for listing on the
Nasdaq SmallCap Market and might therefore be eligible to trade on the OTC
Bulletin Board. Upon closing of the proposed merger, holders of the Company's
common stock will receive ordinary shares of Peptide which are traded on the
London Stock Exchange. It is currently anticipated that the ordinary shares will
be in the form of American Depository Shares (ADSs) and, if they are in this
form, Peptide will apply to Nasdaq for listing of such ADSs.
SUBSEQUENT EVENT: PASTEUR MERIEUX CONNAUGHT
On November 2, 1998, the Company obtained a short-term bridge loan, in the
amount of $3 million, from PMC to support operations. The Company pledged 12%
ownership in the Joint Venture Partnership as collateral. The Company granted
PMC a controlling vote regarding all marketing-related decisions, thereby
granting PMC overall direction of marketing-related matters. The Company will
retain equal voting authority in all non-marketing-related decisions. In
addition, the Company authorized PMC, or should PMC elect, PMC's affiliates, to
act as the principal marketing entity for all Target Products of the Joint
Venture Partnerships. The loan is to be repaid in two installments: $2 million
on January 31, 1999 and $1 million on June 30, 1999. The loan bears an annual
interest rate of 5.42%, which is payable when each installment is due.
In the event that the Company defaults on the loan, PMC would, by virtue of
the Company's pledge of 12% ownership in the Joint Venture Partnership to secure
the loan, increase its ownership interest in the Joint Venture Partnership to
62%, thereby obtaining overall direction of all Joint Venture Partnership
matters. The Company's share of future research, development, clinical and
commercialization costs, and of profits from Target Product sales would then
decrease from the present 50% to 38%.
SUBSEQUENT EVENT: PEPTIDE THERAPEUTICS GROUP PLC
On November 10, 1998, the Company entered into an agreement to be merged
with Cambridge, England based Peptide for stock of Peptide and cash totaling
approximately $15 million. Peptide is a biopharmaceutical company engaged in the
research and development of novel drugs and vaccines, and is listed on the
London Stock Exchange, under the symbol PTE. Peptide currently has four products
in clinical development with several pre-clinical and research programs. The
Company and its Joint Venture partner PMC are already collaborating with Peptide
in using Peptide's proprietary platform technology to create oral vaccines for
the treatment of H. pylori. The merger will create a larger biopharmaceutical
company involved in the development of novel drugs, vaccines and antibody
products that control significant human diseases. The merged company will have a
total of ten products in development, six of which are currently in clinical
trials, with a further four scheduled to go into clinical trials in the next
twelve months, and multiple corporate partnerships including those with PMC and
SmithKline Beecham. This new business combination will result
13
<PAGE> 14
in a broader portfolio of product programs, and greater market presence and
potential for expanded corporate partnerships.
The transaction will take the form of a merger of the Company with a
subsidiary of Peptide, formed for the transaction, and the Company will become a
wholly owned subsidiary of Peptide following the merger. Completion of the
merger is subject to certain conditions, including approval by the shareholders
of each company and Peptide raising additional capital to provide sufficient
working capital for the combined company following the merger, as required by
the rules of the London Stock Exchange. The merger is anticipated to be
completed during the first quarter of 1999.
Simultaneous with the execution of the Merger Agreement, Peptide purchased
approximately 95% of the Company's outstanding Convertible Preferred Stock for
an aggregate price of approximately $3 million. Upon completion of the merger,
the Convertible Preferred Stock held by Peptide will be retired.
Holders of the Company's Common Stock will receive ordinary shares of
Peptide, equal to $15 million, less the amount of cash paid by Peptide to
acquire the Convertible Preferred Stock and certain other securities of the
Company. Holders of options and warrants for the purchase of the Company's
Common Stock will receive options and warrants for Peptide ordinary shares in
exchange for their options or warrants. It is currently anticipated that the
ordinary shares will be in the form of American Depository Shares ("ADS's") and,
if they are in this form, Peptide will apply to Nasdaq for listing of such
ADS's. The exchange ratio of Peptide ordinary shares for the Company's Common
Stock delivered in the merger will be determined based upon the
mid-closing-price of Peptide ordinary shares on the London Stock Exchange for
the ten trading days prior to the third business day, prior to the closing,
provided that the price used to determine the exchange ratio will not be less
than $1.49 nor more than $2.24. Assuming, for purposes of illustration, that $3
million in cash is paid by Peptide for the Convertible Preferred Stock and other
OraVax securities (not including common stock), approximately $12 million of the
merger consideration would, under the terms of the Merger Agreement, be paid to
the holders of Common Stock of the Company in the form of Peptide ordinary
shares. Assuming further that the average price of Peptide's ordinary shares
during the 10-day measurement period was equal to Peptide's share price of 112.5
pence ($1.87) on November 10, 1998, the last trading day prior to execution of
the Merger Agreement, the total number of ordinary shares of Peptide to be
issued would be approximately 6.4 million. The Company currently has 17.8
million shares of common stock outstanding, and further shares could be issued
prior to the closing of the merger upon conversion of Convertible Preferred
Stock or warrants. Assuming, for illustration, that 20 million shares of Common
Stock of the Company were outstanding at the effective date of the merger, each
share of the Company's Common Stock would be converted into the right to receive
approximately .32 ordinary shares of Peptide, with a value per share of the
Company's Common Stock of approximately $.60. Peptide currently has 36.4 million
shares outstanding.
As of November 13, 1998, there were shares of Preferred Stock and warrants
for the purchase of Preferred Stock outstanding that could be converted into
common stock prior to the closing of the merger or which could be liquidated for
cash in the merger. Depending upon the decisions of the holders of such
Preferred Stock and warrants and assuming the effective conversion price, as of
November 13, 1998, the number of shares to be exchanged in the merger and the
amount of cash applied to purchase the outstanding Stock or warrants in the
merger will vary. The value per share of the Company's Common Stock in the
proposed transaction would range approximately from $.56 to $.63. The share
price will be fixed once the holders of these securities make their election for
either a cash or common stock distribution.
In addition, Peptide has agreed to provide additional working capital
financing on a secured basis under certain circumstances.
The Company is being advised by Hambrecht & Quist and Peptide is being
advised by BT Alex. Brown International in connection with this transaction.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results are difficult to predict and may be
affected by a number of factors, including the following, that could cause
actual results to differ materially from those indicated by the forward-looking
statements made herein and presented elsewhere by management from time to time.
14
<PAGE> 15
Early Stage of Product Development. The products under development by the
Company will require significant additional research and development efforts,
including extensive clinical testing and regulatory approval, prior to
commercial use. The Company's potential products are subject to the risks of
failure inherent in the development of pharmaceutical products based on new
technologies. These risks include the possibilities that the Company's
therapeutic approach will not be successful, that any or all of the Company's
potential products will be found to be unsafe, ineffective, toxic or otherwise
fail to meet applicable regulatory standards or receive necessary regulatory
clearances, that the potential products, if safe and effective, will be
difficult to develop into commercially viable products, to manufacture on a
large scale or be uneconomical to market, that proprietary rights of competitors
or other parties will preclude the Company from marketing such products; or that
competitors or other parties will market superior or equivalent products.
Future Capital Needs. In addition, the Company will require substantial
additional funds in order to continue its research and development programs,
preclinical and clinical testing of its product candidates and to conduct full
scale manufacturing and marketing of any pharmaceutical products that may be
developed. The Company's capital requirements depend on numerous factors,
including but not limited to the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, competing technological and market developments, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the development of commercialization
activities and arrangements, and the purchase of additional facilities and
capital equipment.
The Company believes, based upon its current operating plan, that, in
addition to its available cash balances and known revenues, it will need to
raise additional capital in the first quarter of 1999 in order to fund
operations. On November 2, 1998, the Company completed a bridge loan from PMC in
the amount of $3 million to provide operating funds for the Company during the
period prior to the anticipated closing of the merger with Peptide. This loan is
secured by a 12% partnership interest of the Company in the Joint Venture and is
repayable to PMC -- $2 million on January 31, 1999 and $1 million on June 30,
1999. Peptide also has agreed to provide working capital financing on a secured
basis under certain circumstances. Changes in the Company's research and
development plans or other events affecting the Company's operations may result
in accelerated or unexpected expenditures. The Company is continuing to review
its burn rate and has implemented expenditure initiatives to conserve its cash
resources, including putting non-essential expenditures on hold. As part of the
merger with Peptide, the combined entity will be seeking financing. The Company
in the meantime continues to pursue corporate collaborations and the award of
new government grants. There can be no assurances, however, that changes in the
Company's research and development plans, acquisitions or other events affecting
the Company's operations will not result in accelerated or unexpected
expenditures. Thereafter, the Company will need to raise substantial additional
capital to fund its operations. There can be no assurance, however, that
additional financing will be available, or if available, will be available on
acceptable or affordable terms.
Manufacturing Limitations. At present, the Company's ability to
manufacture its products is limited to clinical trial quantities. The Company
currently does not have the capability to manufacture commercial quantities of
products. The Company's strategy is to develop its manufacturing facilities for
producing both pilot-scale and commercial quantities of its products. To ensure
compliance with current Good Manufacturing Practices ("cGMP") imposed by the
FDA, OraVax will need to establish sufficient technical staff to oversee all
product operations, including quality control, quality assurance, technical
support and manufacturing management. The Company may enter into arrangements
with contract manufacturing companies to expand its own production capacity in
order to meet requirements for its product candidates. If the Company chooses to
contract for manufacturing services and encounters delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
its finished pharmaceutical or other medical products (if any), clinical trials,
market introduction and subsequent sales of such products would be adversely
affected. Moreover, contract manufacturers must operate in compliance with cGMP.
The Company's potential dependence upon third parties for the manufacture of its
products may adversely affect the Company's profit margins and its ability to
develop and deliver such products on a timely and competitive basis.
15
<PAGE> 16
Risks Associated with Collaborative Arrangements. The Company's product
development strategy may require the Company to enter into various additional
arrangements with corporate, government and academic collaborators, licensors,
licensees and others. Therefore, the Company may be dependent upon the
subsequent success of these outside parties in performing their
responsibilities. There can be no assurance that the Company will be able to
establish additional collaborative arrangements or license agreements that the
Company deems necessary or acceptable to develop and commercialize its potential
pharmaceutical products or that such collaborative arrangements or license
agreements will be successful.
Patent and Proprietary Rights. The Company seeks to protect its trade
secrets and proprietary know-how, in part, through confidentiality agreements
with its employees, consultants, advisors and collaborators. There can be no
assurance that these agreements will not be violated by the other parties, that
OraVax will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. Certain of the technology that may be used in the products of
OraVax is not covered by any patent or patent application. There can be no
assurance that any pending patent applications relating to the Company's product
candidates will result in patents being issued. Moreover, there can be no
assurance that any such patents will afford protection against competitors with
similar technology. There may be pending or issued third-party patents relating
to the product candidates of OraVax. OraVax may need to acquire licenses to, or
to contest validity of, any such third party patents. It is likely that
significant funds would be required to defend any claim that OraVax infringes a
third-party patent, and any such claim could adversely affect sales of the
challenged product of OraVax until the claim is resolved. There can be no
assurance that any license required under any such patent would be made
available.
Government Regulation. The rigorous preclinical and clinical testing
requirements and regulatory approval process of the FDA and of foreign
regulatory authorities can take a number of years and require the expenditure of
substantial resources. The Company has limited experience in conducting and
managing preclinical and clinical testing necessary to obtain government
approvals. There can be no assurance that the Company will be able to obtain the
necessary approvals for clinical testing or for the manufacturing and marketing
of any products that it develops. Additional government regulation may be
established that could prevent or delay regulatory approval of the Company's
product candidates. Delays in obtaining regulatory approvals would adversely
affect the marketing of any products developed by the Company and the Company's
ability to receive product revenues or royalties. If regulatory approval of a
potential product is granted, such approval may include significant limitations
on the indications for which such product may be marketed. Even if initial
regulatory approvals for the Company's product candidates are obtained, the
Company, its products and its manufacturing facilities are subject to continual
review and periodic inspection. The regulatory standards for manufacturing are
applied stringently by the FDA. Discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on such product,
manufacturer or facility, including warning letters, fines, suspensions of
regulatory approvals, product recalls, operating restrictions, delays in
obtaining new product approvals, withdrawal of the product from the market, and
criminal prosecution. Other violations of FDA requirements can result in similar
penalties.
Uncertainty of Third-Party Reimbursement. Government and other third-party
payers are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for new products approved for marketing
by the FDA and by refusing, in some cases, to provide any coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. If adequate coverage and reimbursement levels are not
provided by government and third party payers for uses of the Company's
products, the market acceptance of these products would be adversely affected.
Year 2000 Compliance
The year 2000 ("Y2K") problem is the result of computer programs having
been written using two digits, rather than four, to define the applicable year.
Computer programs and embedded computer chips may be unable to distinguish
between the years 1900 and 2000. Any computer hardware, software, research and
development, manufacturing or administrative equipment, and operational
infrastructure systems used by the Company or by its external business partners
may recognize a year using "00",as the last two digits, as the year 1900 rather
than the year 2000.
16
<PAGE> 17
During the third quarter of 1998, the Company implemented an internal Y2K
compliance task force. The goal of the task force is to identify and minimize
disruptions to the Company's business that could result from the Y2K problem,
and to minimize liabilities that the Company might incur in connection with the
Y2K problem. The task force consists of employees of the Company and is
representative of major business functions.
The Company is in the process of conducting a company-wide assessment of
its computer systems and operations infrastructure to identify computer
hardware, software, research and development equipment and process control
systems that are not Y2K compliant. The Company intends to replace, upgrade or
modify any of its business-critical systems that are not Y2K compliant, or to
develop contingency plans. The Company anticipates to have these steps completed
by the end of the first quarter in 1999.
The Company has also identified and prioritized significant service
providers, vendors, suppliers, and worldwide research and development,
manufacturing and clinical trial related third parties that are critical to
business operations. The Company is in the process of communicating with these
external parties, through interviews and questionnaires, to ascertain their Y2K
compliance. These evaluations will be followed by the development of contingency
plans, including identifying alternate service providers and contractors,
vendors and suppliers. The Company anticipates to have these steps completed by
the end of the first quarter in 1999. Going forward, the Company will use its
best efforts to ensure that new service providers and contractors, vendors and
suppliers are Y2K compliant before engaging in business with them.
The Company's greatest risk is the failure of critical, worldwide research
and development, manufacturing or clinical trial related service contractors not
being Y2K compliant. Because of the significant number of these external service
contractors and the vast number of business systems used by these parties, the
Company may experience some disruption in its business operations. The Company
is unable to determine at this time whether the consequences of Y2K failures by
these parties will have a material impact on the Company's business operations.
The Company believes that with the implementation of contingency plans,
including identifying alternate service contractors, the possibility of material
interruptions of normal operations should be reduced. However, there is no
assurance that the Company will be successful in finding alternate service
contractors. In the event that the Company is unable to replace Y2K
non-compliant service contractors, the Company's business operations could be
adversely affected.
To date, the Company has not incurred any material costs related to the
assessment of its internal and external Y2K compliance. The costs of the
Company's Y2K compliance efforts are not yet determined. The Company does not
anticipate incurring any material costs to ensure internal and external Y2K
compliance.
The Company is using its reasonable best efforts to ensure internal and
external Y2K compliance. However, there can be no guarantee that the Company's
assessment and correction efforts will prove accurate. Key external business
partners may be unsuccessful in solving their Y2K issues and the Company may be
unsuccessful in identifying alternate critical service providers and
contractors, vendors and suppliers. As a result, Y2K problems may adversely
impact the Company's business operations. The Company's readiness program is an
ongoing process and the estimates of costs and completion dates described above
are subject to change.
Because of these and other factors, past financial performance should not
be an indicator of future performance. Investors should not use historical
trends to anticipate future results and should be aware that the trading price
of the Company's common stock may be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, changes in the biotechnology
and pharmaceutical industries and recommendations by analysts or other events.
17
<PAGE> 18
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities
Not Applicable
ITEM 3. Default Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Securities Holders
Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
18
<PAGE> 19
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OraVax, Inc.
Date: November 16, 1998
/s/ LANCE K. GORDON
------------------------------------
Lance K. Gordon
President and Chief Executive
Officer
Date: November 16, 1998
/s/ BRIGID A. MAKES
------------------------------------
Brigid A. Makes
Chief Financial Officer
(CFO and Principal Accounting
Officer)
19
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